British stocks closed lower on Friday, marking a second straight week of losses, as rising tensions in the Middle East raised concerns about inflation and complicated the Bank of England’s monetary policy outlook. The blue-chip FTSE 100 index fell 0.4%, while the mid-cap FTSE 250 index also lost 0.4%. Although both indexes recorded losses for the week, the decline from the previous week was evident.
Market sentiment was dampened as the US-Israel conflict with Iran approached its third week, with Washington adopting a tougher stance and Tehran vowing to maintain the closure of the Strait of Hormuz. Adding to the negative sentiment, recent data showed that the UK economy unexpectedly stagnated in January after weak growth in previous months, indicating a slowdown before the conflict intensified.
Analysts believe that the prolonged closure of the Strait of Hormuz and continued high energy prices are key risks. Jonathan Stubbs, an analyst at Berenberg, noted that the Bank of England is likely to postpone interest rate cuts for the rest of the year to avoid a depreciation of the pound, which could push up inflation. Money markets have already priced in expectations for a rate cut by the Bank of England in March, according to LSEG data. Several major banks, including BofA, Goldman Sachs, Standard Chartered, and Morgan Stanley, have revised their forecasts to expect a delay in easing by the BoE, which is now projecting the first cut in the second quarter.
Among individual stocks, HSBC and Standard Chartered fell 1.2% and 3.2% respectively. These banks have significant investments in the Gulf region and have faced operational constraints due to the conflict. In contrast, the UK energy index rose 1.1%, with oil majors BP and Shell up 0.9% and 1.1% respectively, as Brent crude prices topped $100 a barrel.
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